Why do regional price differences occur?

While most of us know paying for energy can be a postcode lottery, few people know why.

The reasons are threefold:

How much the energy company sells in your area

How much it buys from generators in your area

The different charges imposed on the energy supplier by the local distribution network in your area

The first reason comes, quite simply, down to demand. If there are relatively few people in your area, then the per-unit cost is driven up.

To provide you with power, energy companies buy energy from generators. These purchases are made in advance based on predictions about demand, so if they need to supply more at short notice for instance, it can drive overall costs up.

Finally, the energy suppliers distribute most of the energy through local distribution networks. The main 14 networks in the UK are owned by six companies, each of which may charge suppliers a different fee.

How large are regional price differences?

Price differences can be substantial between regions, with research from 2012 finding a £92 difference between Merseyside and the South of Wales — where prices were highest — and the North of Scotland and the East Midlands — where prices are lowest.

The next-cheapest regions in the UK for energy are London, Southern England and the South-East.

For example, figures from the Department for Energy and Climate Change (DECC) show that the average electricity unit cost in Canterbury is 14.06p, rising to 14.39p in London, 15.25p in Cardiff, and 16.55p in Belfast.

Bear in mind that those are just average prices, but the differences could be far higher. For instance, the cheapest rate offered to Direct Debit customers in Leeds was 12.21p, compared to the 18.17p per unit a credit-based customer in Plymouth would pay.

How do UK energy prices compare to the rest of Europe?

While there may be huge regional differences within the UK, they are nothing compared to the differences between countries within Europe.

The UK pays just 0.044 euros per kilowatt of gas, less than half the 0.108 euros paid by Denmark, and significantly lower than the 0.079 euros it costs in Italy.

Likewise, we pay 0.170 euros per kilowatt of electricity compared to 0.265 euros in Germany, and 0.225 euros in Ireland.

The reasons for this are weather variations, as well as the amount of energy that is produced domestically in comparison to what is imported, and the type of energy used to produce electricity.

What do energy prices consist of?

You energy bill may be divided between electricity and gas, but what goes into your bill to bring up the total amount?

The energy regulator Ofgem calculates that the largest chunk of your bill consists of wholesale energy costs, or the price that energy companies have to pay to get the energy.

Wholesale gas and electricity is 46% of your bill, while the next-largest piece — accounting for 23% on average — are network costs (the costs of distributing the energy).

Approximately 13% of your bill is operating costs incurred by your supplier, such as operating the IT systems and paying staff, while 8% is made up of environmental and social costs (green subsidies) that energy companies are required to pay by the government.

The final 10% is divided between VAT and the energy supplier’s profits.

Therefore, if you are seeing an increase in your energy bills, the largest single factor will be the wholesale cost of gas and electricity, so the actual cost of producing it, followed by the cost of distributing it.

How can you keep energy bills down?

They say prevention is better than a cure, and the same applies to energy. The single-best way to keep your energy costs down is to use less energy, and there are ways you can save without resorting to wearing a winter jacket to bed.

First of all, make sure you are on the cheapest tariff. Be sure to compare energy prices to make sure you are on the best deal.

Energy suppliers have a range of tariffs offering dual-fuel discounts, discounts for paying by Direct Debit, and discounts for managing your account online.

Similarly, different suppliers offer different rates, even in the same area.

When it comes to reducing your energy use, make sure you do the simple things first. Ensure all your light bulbs are energy saving, check for draughts around windows and doors, and turn your thermostat down one degree.

Next, if your property has a loft, make sure you have loft insulation. Loft insulation is one of the most cost-effective ways to save on energy, and even if you already have insulation in place you should make sure it is up to the correct level.

Cavity or solid-wall insulation can also be a great way to keep you home warm, but whether you are suitable or not will depend entirely on your property. Read our dedicated home insulation guide to learn more.

You should also make sure you take advantage of any government grants available to you. If you are receiving a pension for example you may be entitled to the warm homes discount.

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